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Friday, January 13, 2012

Malnourished India- Given with wrong food?

The truth behind India’s economic policies

Scene-1

Indian economic crisis

From 1950 to 1980, while the Indian economy was growing at a relatively slow rate of 3.6 percent, domestic investment exceeded domestic savings by only a small margin. The gap could be bridged through foreign borrowing on a small scale. However, during the period 1979 to 1990, when the growth rate of GDP accelerated to 5.4 percent, the gap between savings and investment widened substantially. The need to finance large capital expenditures, imports of machinery and raw materials, including oil, necessitated heavy borrowing from abroad. The result was a cumulative increase in foreign debt and in repayment liability. Foreign debt increased from US$23.5 billion in 1980 to $63.40 billion in 1991. In 1991, nearly 28 percent of total export revenues went to service the debt. The most important reason for the internal savings rate falling increasingly short of investment requirements was the expanding fiscal deficit of the government which had risen from an average of 6.3 percent of GDP during the Seventh Five-Year Plan to 8.2 percent by 1990-91.

Political changes, unrest in parts of the country, and the 1990 Persian Gulf crisis compounded the already volatile situation. The crisis caused oil prices to rise, substantially increasing the cost of oil imports, and foreign exchange earnings to drop. India's creditworthiness, already under strain, became even more vulnerable as Indians from abroad withdrew their substantial foreign currency deposits and commercial banks reduced their exposure. Toward the end of 1990, India's creditworthiness was downgraded, effectively cutting its access to sources of commercial credit. By early 1991, India was on the brink of default.

India had no other option except to borrow additional loans from IMF and world bank.

Scene-2

IMF and World Bank- what they are interested in?

The IMF and World Bank’s policies are very different now from their original intent.

The International Monetary Fund and the World Bank were conceived by 44 nations at the Bretton Woods Conference in 1944 with the goal of creating a stable framework for post-war global economy. The IMF was originally envisioned to promote steady growth and full employment by offering unconditional loans to economies in crisis and establishing mechanisms to stabilize exchange rates and facilitate currency exchange. Much of that vision, however, was never born out. Instead, pressured by US representatives, the IMF took to offering loans based on strict conditions, later to be known as structural adjustment or austerity measures, dictated largely by the most powerful member nations.

The 80s will be remembered as the decade of global impoverishment linked to the Bank and the IMF's infamous medicine: the Structural Adjustment Program (SAP). These programs are being implemented in over 70 Third World and Eastern European countries with devastating results. The Bank-IMF sponsored SAP has two phases. The first phase is short-term macro-economic stabilization. It is followed by implementation of a necessary structural reforms phase. In the early 80s, most SAPs focused on a narrow range of policies aimed at reducing account deficits.

As the debt crisis deepened and it became obvious that the stabilization programs were not working, the US Treasury Secretary, Mr. James Baker came up with a strategy to solve the debt crisis. This was called the 'Baker Plan'. Under this plan, the WB was asked to impose more comprehensive conditions on the debtor countries. By 1990, majority of the countries that had received conditional loans from the IMF also received structural adjustment loans with harsh conditionalities from the Bank.

In 1992, the bank's lending for SAPs totaled 5847 million or 27% of its total commitments. More than 70 countries are subjected to 566 IMF and World Bank stabilization and SAPs in the last 14 years. These countries were told that the structural reforms were essential for sustaining growth and economic stability. Faced with the threat of a cut off of external funds Aid needed to service the mounting debts incurred from western private banks in the 1970s, these countries had no choice but to implement the painful measures demanded by the Bank.

Fourteen years after the World Bank issued its first structural adjustment loan, most countries are still waiting for the market to "work its magic". Despite global adjustment, the third world's debt burden rose from $785 billion at the beginning of the debt crisis in 1978 to $1.3 trillion in 1992. The structural adjustment loans from the Bank have enabled the third world countries to make interest payments to western commercial banks. Having done this, the Bank went on applying adjustment policies to assure a regular supply of repayments in the medium and long term. Thus, the structural adjustment has brought neither growth nor debt relief, it has certainly intensified poverty.

What is structural adjustment program?

SAPs are built on the fundamental condition that debtor countries have to repay their debt in hard currency. This leads to a policy of ‘exports at all costs’ because exports are the only way for ‘developing’ countries to obtain such currencies. A first feature of SAPs is therefore a switch in procuction from what local people eat, wear or use towardes goods that can be sold in the industrialised countries. Since the 1980s dozens of countries have followed these policies simultaneously. They often exported the same primary commodities, competed with each other and then suffered because of declining world market prizes for their commodities. Between 1980 and 1992, ‘developing’ countries lost 52% of their export income due to deteriorating prizes.

SAPs have 4 fundamental objectives according to which they are shaped:

1.Liberalization: promoting the free movement of capital; opening of national markets to international competition.

2.Privatization of public services and companies.

3.De-regulations of labor relations and cutting social safety nets.

4.Improving competitiveness

Based on these objectives, SAPs prescribe nearly always the same measures as a condition for new loans. These are:

·reduction of government deficit through cuts in public spending (cost recovery programmes);

·higher interest rates

·liberalisation of foreign exchange rules and trade (deregulation);

·rationalisation and privatisation of public and parastatal companies;

·deregulation of the economy, for example:

- liberalisation of foreign investment regulations

- deregulation of the labour market, e.g. wage ‘flexibility’

- abolishing price controls and food subsidies

·shift from import substitution to export production

These measures forced countries on a path of deregulated free market economies. The IMF/World bank basically determine countries’ macro-economic policies, they take control over central bank policies and over public expenditure through the so-called ‘Public Expenditure Review’. SAPs promote the principal of cost-recovery for social services and the gradual withdrawal of the state from basic health and educational services. Under its ‘Public Investment Programme’ the IMF even decides what type of infrastructure should be built while an imposed system of international tender ensures that public-works projects are

Much acclaimed as Manmohan singh reforms, India implemented its economic reforms in 1991, which was projected in the media as the reforms are done in best of interest of the country and as if it where the brain child of well wishers of India’s growth i.e., the Indian economists.

The series of policy measures launched by the Indian government are part of structural adjustment program in India. Government has taken up following measures to implement SAP :

·Devaluation of rupee by 23%

·New Industrial Policy allowing more foreign investments

·Opening up more areas for private domestic and foreign investment

·Part disinvestment of government equity in profitable public sector enterprises

·Sick public sector units to be closed down

·Reforms of the financial sector by allowing in private banks

·Liberal import and export policy

·Cuts in social sector spending to reduce fiscal deficit

·Amendments to the existing laws and regulations to support reforms

·Market-friendly approach and less government intervention.

·Liberalization of the banking system

·Tax reforms leading to greater share of indirect taxes

The reforms were nothing but implementation of IMFs condition which India was forced to accept while borrowing $500 million from world bank

All the above men-tioned ingredients of SAP are based on the Anderson Memorandum titled "Trade Reforms in India" dated Nov. 30, 1990 submitted to Government of India by the World Bank. It is interesting to note that this memorandum was not disclosed to the then Prime Minister, Mr. Chandra Shekhar, the then Finance Minister and the Cabinet Secretary by a group of senior officials in the Finance Ministry. Incidentally, all these officials were ex-World Bank and ex-IMF employees

When these 'reforms' were initiated, the Government denied any pressure from the Bank or IMF but had few takers. But very few believed in it. The Government's claim that they had been independently decided to carried little weight. Later on the Finance Minister told Parliament that the loans of the Bank and IMF carry conditionality’s. In fact, the Finance Minister did not disclose about his correspondence with the IMF and the Bank, due to great public pressure, he presented to Parliament the terms of the IMF standby credit of $2.2 billion. But, the same consideration was not applied to reveal the policy conditions accepted under the Structural Adjustment Loan of $900 million by the World Bank. When news of the Bank having access to the 1992-93 budget and the Eighth Five Year Plan document prior to their presentation to Parliament,, the government was forced to make them public.

Under SAP, WB is not supervising individual sectors of the Indian economy such as agriculture, social sector and energy sector. The Bank now monitors the entire macro-economy such as balance of payments, fiscal deficit, foreign investment, money supply, etc. The public expenditure reviews are a part of the Bank's conditionality’s. Under this review, the Bank not only asks for cuts in expenditure but also gives detailed instructions for cuts in specific sectors. The health budgets in recent years are an example of this. Health, far from being accepted as a basic right of the people, is now being shaped into a saleable commodity, thereby, excluding those with less or no purchasing power. The existing distortions of health services in India are getting accentuated with the Government following the Bank's agenda on healthcare. The budget of 1994-95, of which health care forms just 0.58% is an indication of the government willingness to adopt Bank's policies. In India, the health care agenda is increasingly being set out by the Bank rather than by the people and the Indian state.

Scene-4

Impact of structural adjustment in other developing countries

Despite the IMF and World Bank claims of SAP successes, it is widely acknowledged that SAPs have failed to achieve their goals. They have not created wealth and economic development as unregulated markets did not benefit the poor and failed to protect the delivery of social services. The IMF/World Bank believe that the elimination of protective tariffs will make domestic industries more competitive. In reality, domestic manufacturing often collapsed and imported consumer goods replaced domestic production. Other results of SAPs were:

·Privatisation allows international capital to buy state enterprises at very low costs.

·Deregulation of the banking system leads to very high interest rates which makes most goods unaffordable to the majority.

·Elimination of subsidies and prize controls, covered with devaluation lead to price increases and reduce real earnings in the formal and informal sectors.

·Free movement of foreign exchange allows foreign companies to repatriate their profits. It also allows the ‘laundering’ of ‘dirty money’ from offshore banking accounts.

·Cost-recovery programmes in the health sector increased the inequality in health care delivery, reduced health coverage and increased the number of people without access to health care. Diseases like cholera, malaria and yellow fever are on the increase again.

·Various NGOs funded by international aid agencies have gradually taken over government functions in the social sector.

·Cuts in public sector employment (for example 300 000 civil servants were retrenched in Zaire - now DRC - in 1995), coupled with bankruptcies of local companies has led to large increases in unemployment.

·Liberalisation of the labour market leads to the elimination of cost of living adjustment clauses in collective agreements and to the phasing out of minimum wage legislation.

·Export orientation in agriculture is eliminating subsistence crops and accelerates the exodus of the unemployed towards the cities. (See Touissant and Comanne 1995: 9; Chossudovsky 1995:58-64)

Even in those countries that are singled out as success stories, SAPs imposed severe hardships on the poor. In Uganda, for example, the government obediently followed the World Bank/IMF policies and implemented far-reaching liberalisation such as

·Drop in formal sector employment to less than 14% of the economically active population

·Retrenchment of more than half the civil service (170 000)

·Lack of equipment and medication in government health facilities

·Collapse of small enterprises

·Declining co-operative movement

·Trade Unions lost 60% of their members since 1990

SAPs had a detrimental effect on social services. In the education sector, for example, they led to:

·Increasing class size (student-teacher ratios)

·Increasing school fees as part of cost-recovery programmes

·Reduction in the number of teachers and/or wage freezes

·Introduction of ‘double shifts’

·Drop in the standard of public education due to deteriorating facilities

·Increase in private schools for the wealthy

·Increasing inequalities in the standard of education between poor and rich communities

·Lower enrolment at schools as the poor have to choose between feeding their children and paying for school uniforms, stationery and school fees.

·Finance-driven education reforms under SAPs often reversed the gains made by African countries after independence.

SAPs meant that most countries had to make major cuts in their education budgets and the world-wide rate of illiteracy began to grow again after a long period of decline (see Bournay 1995: 51). The poor and vulnerable groups in society are always the hardest hit by the SAP measures. SAPs have had a particularly negative effect on women because:

·Privatisation of social services like health and education makes these services unaffordable for the poor. As a result, women are often forced to take on these responsibilities, for example tacking care of the sick.

·Cuts in education services lead to an increase in illiteracy among women and girls. Under SAPs, the drop-out rate for girls is increasing.

·In Zambia, the hardships caused by SAPs led to an increase in divorces. Men left their homes because they were unable to look after their families. As a result, more women were forced to look after their children on their own.

Scene-5

Growth in Indian economy- post liberalization and its impact on agriculture

The total geographical area of India is 328.7 million hectares of which 140.3 million ha is the net sown area while 193.7 million ha is the gross cropped area, according to the annual report 2009-10 of the Ministry of agriculture. The growth rate of India GDP is 9.4% in 2006- 2007. The agricultural sector has always been an important contributor to the India GDP. This is due to the fact the rural economy of the country is agriculture driven and employs around 60% of the total workforce in India. The agricultural sector contributed around 18.6% to India GDP in 2005. The economic liberalization policy, has caused a reduction in this GDP to 14.6 % in 2009-2010 (by 4 %) and the employment potential to 55 % (5 % reduction than in 2006-2007). As per 2008 estimate, the sector wise GDP shows that, the share of GDP by agriculture was 17.2 %, Industry was 29.1 % and Services was 53.7 %. In 2009, this share was 15 % in agriculture, 28 % in Industry and 57 % in Service sector. However with respect to labor employed 14 % are employed in industry sector and another 34 % in service sector. It go’s unsaid, that the growth is not uniform and the benefits of this economic growth is enjoyed by meager section of the society.

There is steady decline in GDP in agriculture which has the direct effect on rural economy. This widens the gap between the rich and poor, needless to say the rural poor who depend on agriculture are the most affected.

Scene-6

Downward trend in Overall economic growth

After a fast growth, which is unbalanced the real tooth of economic reforms are now showing off. The country’s overall GDP is in very bad shape. As it has become clearer that Indian economy will not be able to achieve its GDP growth forecast of 8% or thereabouts for 2012, it might have to possibly settle for a figure slower than the government’s revised estimate of 7.5%. This has been clearly visible on the performance of the domestic stock markets, which has been one of the world’s worst performers, worse than the stock markets of other BRIC economies. We are not expecting the sentiments to improve in a flash, ie within the next few months and see a rally thereafter, even though we are a structurally strong economy with good fundamentals, India as a country in the present economic scenario cannot isolate itself from the risk posed by the global economic turmoil.

Factors hurting the domestic economy Inflation and Capital Runaway has been the 2 main factors hurting the economy. Inflation has so far remained above 9% and RBI had done around 13 interest rate hike decision since December 2010 to curb inflation. Country’s economic momentum has been dragging due to the monetary tightening and inflation issues.

Capital outflows, domestic corruption and policy paralysis (lack of policy developments) have also given a massive blow to the economic sentiments here. Foreign investors have also pulled out massive amounts of fund from India in order to cut their risk exposure to India. Foreign investors have only $530 million in Indian equities this year, compared with $28.9 billion a year ago, according to the Securities and Exchange Board of India (SEBI). India is a country with trade deficit, unlike China which is mainly an export driven economy India is a relatively smaller player with its exports account to only 10% of GDP and it needs a strong Rupee to make the imports cheaper and attract more foreign investments. A slowdown in FII inflows will severely affect India, which is structurally a current account deficit economy where the current account deficit is usually financed by the steady FII inflows, which actually helped to offset the capital deficit.

The rupee downfall

Towards the end of 2011, sustained demand for the dollar, worsening domestic economic scenario and persistent capital outflows pushed the rupee to historic lows against the US dollar. The Indian local currency fell to its all-time low of to 54.30 per dollar on 15 December, elevating concerns of policy makers. On the last day of the year (30 December) the rupee closed at 53.10 to the greenback, down over 18% from the first day of the year.

Is there a Solution?

It is more clear that the economic decisions of our country is not in our hands, but in the hands of world bank and IMF and the countries influencing it. It is a natural phenomena, that when we borrow we lose our personal decision making power. The influence by foreign hands extends to the appointment of Finance minister for our country. When P. Chidambaram resigned as FM and took over the portfolio of home ministry, Mrs.Hilary Clinton was interested in the selection of new FM and whether he will be favorable towards U.S. Her preference was for Mr. Montek Singh Alluwaliah and since Mr. Pranab Muharjee too was found nonthreatening he had a chance to become FM ( wikileak cables)

India is basically a agricultural country and the growth should have been planned using its inherent strength. Agricultural growth is on back foot since introduction of liberalization concept and the cost of cultivation has increased many folds, not in proportion with the price of the outputs. The agricultural productivity has also slow down and there are no good efforts or research on part of the government to increase agricultural productivity. The schemes and plans to support farmers, as usual did not meet the need. We have a very serious implementation problem with schemes due to politicization and corruption and due to implementation of schemes without building the knowledge regarding them to the intended beneficiaries.

Whichever government comes into force, it has no other go but dance to the tune of world bank and IMF since the loan was sanctioned only after signing the structural adjustment agreement.

Can we say that our country is Independent? The MLAs and MPs we select cannot act in our nation’s interest even if they wish to do so.

This is a compilation of different observations on India's economic policies with my own additions here and there.Thanks to the different websites and authors for the information provided